DOJ Deal Clears Way For World's Largest Airline

AMR Corp. and US Airways are just weeks from finalizing their proposed merger, following a settlement deal with the U.S. Justice Department (DOJ) that calls for the divestiture of slots at Washington Reagan National Airport and New York LaGuardia Airport as well as gates at Boston Logan International, Chicago O’Hare International, Dallas Love Field, Los Angeles International and Miami International airports.

The deal comes three months after the DOJ and six state attorneys general filed a court motion to stop the merger based on claims it would stifle domestic competition. That case was due to start Nov. 25, but has now been superseded by this new settlement.

The merger now awaits the approval by AMR’s bankruptcy judge of this divestiture agreement, which AMR and US Airways expect in the coming weeks. In a letter to employees, AMR Chairman and CEO Tom Horton and US Airways Chairman and CEO Doug Parker (who also will be CEO of the “new American”) say the accord with the DOJ “allows us to complete the merger next month . . . [and that] we look forward to celebrating the creation of the new American with all of you within a few weeks.”

AMR already has asked for an expedited hearing to discuss the DOJ settlement that has been scheduled for late November. If approval is granted by AMR’s bankruptcy judge, the merger is likely to be concluded mid-December.

It is no surprise that the new American is being asked the divest slots at the capacity constrained Washington National and LaGuardia airports, but the call to transfer gate rights at Boston—once an AMR stronghold but now a major base for JetBlue Airways—as well as at American’s hubs in Chicago, Los Angeles and Miami, while rumored, was less expected.

The surprising inclusion of American’s two gates at Love Field, which are currently leased to Delta Air Lines, will allow “a low-cost carrier to provide vigorous competition to the new American’s nonstop and connecting service out of” AMR’s base at Dallas/Fort Worth International Airport when slot constraints at Love Field are lifted next year, explains the DOJ. Love Field is the home of Southwest Airlines.

Southwest and JetBlue are the initial beneficiaries of the settlement, which the DOJ prompts as “guaranteeing a bigger foothold for low-cost carriers at key U.S. airports.” Under the deal, JetBlue takes ownership of the 16 slots it currently leases from AMR at Washington National, while Southwest obtains the 10 slots its leases from AMR at LaGuardia.

AMR also must divest a further 88 slots at National and 34 at LaGuardia, which will be bundled and offered for sale at a time that has not been disclosed by the DOJ. “Preference will be given to airlines at each airport that do not currently operate a large share of slots or gates,” the DOJ notes, adding that other low-costs will be preferred should JetBlue or Southwest not take the slots assigned to them.

But low-cost airlines will face competition from Delta, which just minutes after the DOJ’s deal was announced said it “welcomes the settlement agreement and looks forward to the opportunity to acquire slots that will be divested under the agreement, particularly at Washington Reagan National Airport. Delta is the airline best-positioned to continue competitive nonstop flights from Reagan National to small- and mid-sized cities that could otherwise see service reduced or eliminated, which should be a strong consideration in the divestiture.”

American and US Airways, under a separate deal, also have guaranteed certain routes from National for the next three years, including services to those states that partnered in the DOJ’s opposition. After the divestiture, the new American will still hold 57% of National’s slots, slightly more than US Airways’ current level at the airport. The DOJ says without the settlement, the new American would have controlled 69% of National’s slots.

The remaining divestments at Boston, Chicago, Dallas, Los Angeles and Miami target two gates at each of the five airports.

Bill Baer, the head of the Justice Department’s antitrust division, while calling this settlement “the largest ever in an airline merger,” during a conference call acknowledged that the agreement does not fully address every claim in its original objection, which named more than 1,000 routes that could be adversely affected by the merger, but added that it in turn provides consumers better options that simply stopping the consolidation of AMR and US Airways.

In filings detailing the settlement, the DOJ also notes, “The proposed remedy will not create a new independent competitor, nor does it purport to replicate American’s capacity expansion plans or create [US Airways discounted] Advantage Fares where they might otherwise be eliminated. Instead, it promises to impede the industry’s evolution toward a tighter oligopoly by requiring the divestiture of critical facilities to carriers that will likely use them to fly more people to more places at more competitive fares. In this way, the proposed remedy will deliver benefits to consumers that could not be obtained by enjoining the merger.”

AMR’s Horton and US Airways’ Parker, for their part, applauded the settlement while focusing on the likely conclusion of their proposed merger before the end of the year. “This agreement allows us to take the final steps in creating the new American Airlines,” says Horton in a statement, adding, “There is much more work ahead of us but we’re energized by the challenge and look forward to competing vigorously in the ever-changing global marketplace.”

Parker in the same statement adds, “This is very good news and we are grateful to all who have made it happen . . . We are pleased to have this lawsuit behind us and look forward to building the new American Airlines together.”

In their letter to employees, the two executives say that despite the divestiture, the merger will still generate the more than $1 billion in annual synergies forecast for 2015 and that “the divestitures required by the settlement are not expected to impact total employment at the new American.”

This sentiment was reiterated during a conference call hosted by executives from AMR and US Airways, during which Parker remarked that while he would “rather not have had to divest those slots” and gates, he expected there to be “no material effect” from the DOJ settlement.

“We still will have the greatest network in the world,” AMR’s Horton added.

Both Parker and Horton accepted that the settlement was “reasonable,” and Horton even noted that it is “not terribly different from what I thought” would need to be conceded to obtain regulatory approval for the merger. Neither Horton nor Parker, however, would speculate that the settlement could only have been reached with the added impetus of the Justice Department’s lawsuit.

The merger will now move quickly—pending bankruptcy court approval—and according to US Airways President Scott Kirby passengers should see the first effect as soon as Jan. 7.

Kirby also said US Airways is ready to transition from Star Alliance to Oneworld in the first quarter of 2014, and has already stopped taking Star bookings for next year in anticipation of the transfer.

[Editor’s note: This article has been updated to include comments from a conference call hosted by AMR Corp. and US Airways]